Top rate tax cut would have 'very large cost'

Former cabinet secretary Lord O'Donnell has revealed that 48p is the optimum rate of tax for exchequer income, making it harder for chancellor George Osborne to cut the top rate to 40p. Photograph: Dominic Lipinski/PA

However the Office of Budget Responsibility report says that the government's calculation of how much less income higher top tax rates bring in is "reasonable and central", and suggests the loss of income from cutting it to 45p would be negligible.

However the report goes on to state the calculations imply that the "revenue maximising" top rate of tax would be 48%, or 48p in the pound. In addition, however, it warns repeatedly that all such estimates include "significant uncertainty".

The report was published in March but the detailed calculation only emerged in an interview with Lord O'Donnell in House magazine.

"It would suggest that under that model a move from 45 to 40 [pence] would have a very large cost," added O'Donnell.

Cutting taxes for the highest paid elite is an especially sensitive issue during the tough austerity cuts the government is implementing to cut the budget deficit.

O'Donnell also told the magazine he was still considering applying to be governor of the Bank of England when Sir Mervyn King retires next summer [2013]: "I'm going to think about that and make a decision nearer the time," he said.

He also criticised the lack of specialist knowledge among ministers' special advisers, adding: "Too many come from a media sort of PR background."

O'Donnell, who was cabinet secretary and head of the civil service from 2005 to the end of 2011, also suggested that Osborne, not civil servants, should take the blame for the "omnishambles" which have dogged the government since the budget in March.

"You basically make the decisions in which case you're accountable," said O'Donnell. "I've never heard the chancellor say anything other than I am responsible for tax decisions."

The Treasury has previously said reports that the chancellor is keen to cut the top tax rate further is only speculation.